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5 post-election lessons to help make us better investors

George Sisti, CFP, is a certified financial planner practitioner and the
founder of On Course Financial Planning, a fee-only Registered Investment
Advisor firm. George graduated with a BS in Mathematics from the State
University of New York at Stony Brook in 1971. After graduation, he served 6
years as a pilot in the United States Air Force, based at McChord AFB, WA. In
2013 he retired after a 35-year career as a pilot for a legacy U.S. airline. George established On Course
Financial Planning in 2004 to help families gain the peace of mind that comes
from knowing that they will be able to retire at the time of their choosing and
not have to worry about running out of money in retirement. He has been a member
of the Financial Planning Association since 2004. He can be contacted through
his website: oncoursefp.com

It was reported throughout the financial media on the Friday prior to the election that the S&P 500 Index
SPX, -1.54%
had declined for nine consecutive days, its longest losing streak in (gasp) 36 years. You had to get past the headlines to learn that the total decline was just 3.1%; putting this news into the "so what?" category. Some commentators placed the blame on Donald Trump's improving poll numbers. There were predictions of a 10% stock selloff if Trump won, giving nervous investors a convenient excuse to sell stocks and stay on the sidelines until after the election.

With all of that in mind, and having had a little bit of time for everyone to take a breathe, here are five lessons from the election and its aftermath that can help us become better investors.

Lesson 1: Attempting to outguess the market's response to the election's outcome was a leap off the high board into the empty pool of market timing. If you changed your portfolio allocation in advance of the election, there's a good chance that your portfolio allocation and risk tolerance are misaligned. If you're a do-it-yourself investor, this might indicate that you need the help and guidance of a capable financial advisor. (If your financial advisor recommends post-election portfolio changes, this might indicate that you need a real financial advisor.)

Your portfolio's equity allocation should be appropriate for your financial risk tolerance; one that can be held for the long term. It shouldn't be influenced by who lives in the White House or the alternating spells of optimism and pessimism that float through the financial markets. Taking a long-term view and ignoring the market's short-term noise are essential components of successful investing.

Lesson 2: The stock market is unpredictable. Fast-forward one week to post-election Friday. The Dow Jones Industrial Average was at a new all-time high; having risen 5.6% for the week — its best weekly performance in five years. The Russell 1000 Index of large-company domestic stocks was up 3.9% for the week. The Russell 2000 Index of small-company domestic stocks was up 10.3% for the week. Just to add icing to the cake, gold had its worst weekly performance in three years, down 3%.

Lesson 3: The financial media is entertainment, not a source of financial insight. Most days, there's barely an hour of real news. Yet the financial media must keep its audience entertained for 24 hours. Consequently, much of what it offers is trivial, repetitive and useless. Yet many investors are addicted to their daily news fix. Obtaining more information tends to boost confidence, but rarely makes us better investors.

Investors who overdose on the news are more likely to focus on short-term issues and engage in counterproductive portfolio tinkering — actions that are likely to benefit firms that advertise in the financial media, not its readers and viewers. Most short-term investors eventually learn this lesson the hard way — after they've gone half-crazy reacting to headlines, chasing past performance and paying the higher costs and taxes associated with frequent trading.

Lesson 4: Ignore all forecasts. On election day, American voters cast their ballots, went home and ate dinner. They woke up the next morning to see a parade of egg-faced pundits trying to explain why they were all wrong. Media pundits who predicted a Clinton victory now pretend to know what a Trump presidency means for stocks and the economy, hoping that we've forgotten the abject failure of their prior forecasts.

The problems everyone is talking about are already factored into current asset prices. It's the unknowable, unexpected events that will determine the market's future direction. That's why most pundits' accurate prediction percentage approximates a coin flip. There's no certainty in life or in investing. Therefore, planning, discipline and flexibility are needed to stay on course. Post-election, unwise investors will seek and follow the predictions of forecasters. Wise investors will stay diversified, periodically rebalance their portfolios, stick with their plan and get on with their lives.

Lesson 5: Pessimistic forecasts tell us more about the forecaster than about the future. Pessimistic forecasts are usually based on a rational analysis of current events, so the warnings appear reasonable. But pessimists just extrapolate present trends. They ignore innovation and how rapidly markets, companies and people adapt to changing events. To the pessimist, today's bad news is the end of the story but to the optimist it's just one chapter of a very long story – one in which the pessimists have usually been wrong.

The run up to the presidential election made almost everyone angry. It's good that we bemoan and fret about our dysfunctional government. It's much better than complacency. It's the government's responsibility to be the guarantor of our freedom to create and innovate. Bad political decisions have economic consequences. If our new president and Congress can ensure that the spirit of innovation and entrepreneurship that has defined America in the past will continue, our economy and quality-of-life will maintain their preeminent positions in the world.

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